a. ( 12 point ) What price will the monopolistically competitive firm charge in

Question

a. (12 point) What price will the monopolistically competitive firm charge in this market? [Hint: Use my 5-step procedure] $_________

b. At the profit-maximizing level of output, what is this firm’s total cost of production?

c. (12 point) What is the profit-maximizing quantity in this market? _________
d. What is the resulting profit the monopolistically competitive firm earn from this profit-

maximizing quantity and price? [Hint: Profit = (P-ATC)×Q]

6

e. How much consumer surplus will be derived from the purchase of this product at the monopolistically competitive price?

f. (12 point) The firm is operating in (for each sub-question circle your answer) i.

ii. Earning
g. (12 point) What will occur in the long run in this industry?

Question 3: Monopolistic Competition (10 points total) See figure below to answer questions a through g. All questions are worth 1 point each unless and otherwise stated 100 MC 90 ATC 65 35 20 15 10 MR Demand 5 1015202530354045 505560“7073"85 9095100105110115120 Q

Explanation / Answer

a. The price charged by the monopolist will be $80

b. At the profit-maximizing level of output, the firm’s total cost of production will be 70*20 = 1400

c. the profit-maximizing quantity in this market will be 20

d. Profits =(P-ATC)×Q = (80-70)*20 = 200

e. Consumer Surplus = 0.5*(100-80)*20 = 200

f. The firm is operating in short run earning economic profits

g. In the long run new firms will enter attracted by economic profits.

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